Idiopathic pulmonary fibrosis is a crippling disease characterized by high mortality. Stem cell based therapies may represent a viable alternative to repair injured lung. Our laboratory has developed a reliable method based on immunodepletion to isolate mesenchymal stem cells (MSCs) from the bone marrow of mice. MSC engraft in mouse lung, adopt alveolar epithelial (AE) type II cell phenotype, and significantly reduced the extent of inflammation and collagen deposition in response to bleomycin. MSC are characterized by their uniform expression of the CD44 antigen. CD44 is a receptor for osteopontin (OPN). Expressed at low levels in normal lung, OPN expression is greatly enhanced during lung injury and therefore, interactions between CD44 and OPN may play an important role in mediating the extent and anatomical location of MSC engraftment in lung. Following lung engraftment MSCs adopt AE type II phenotype. Whether this is the result of cell fusion or the product of a highly regulated cell differentiation program is unknown. MSCs undergo epithelial differentiation in vitro and our data has shown that this process is associated suppression of FGF2, a mitogen for MSCs, and sequential activation of the BMP receptors IA and IB. Activation of BMPR-IA instructs stem cells to commit to a particular fate and induces expression of BMPR-IB, activation of which then promotes terminal differentiation. MSCs constitutively express BMPR-IA but lack expression of BMPR-IB. We hypothesize that inhibition of FGF2 facilitates expression of BMPR-IB and promotes epithelial MSC differentiation. In addition, we hypothesize that under non-inflammatory conditions MSC engraftment may be enhanced and targeted to the lung epithelium by inducing the controlled expression of osteopontin. Finally, we postulate that exogenously administered MSCs engraft in the lung and ameliorate lung injury. Thus, MSCs may be manipulated to deliver therapeutic genes to the injured lung. To test these hypotheses we propose the following specific aims: 1) To determine the molecular mechanism that regulates differentiation of MSCs into epithelial cell fate. 2) To determine the role that CD44/osteopontin interactions play during MSC engraftment in the mouse lung. 3) To determine whether or not the systemic administration of MSCs can be used to ameliorate the fibroproliferative responses observed in the injured lung.